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Tuesday February 7, 2006 - 13:54:58 GMT
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Forex Market Commentary and Analysis (7 February 2006)



The euro was little-changed vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1950 level and was capped around the $1.2015 level. The common currency wandered about fifteen pips above the 38.2% retracement of the move from $1.2590 to $1.1640 and then receded back below the figure. There are a couple of themes on the minds of traders today. First, there is a US$ 21 billion quarterly refunding of three-year U.S. Treasuries today and some traders are concerned that a decrease in foreign bidding may pressure the dollar. A decrease in foreign interest – or indirect bidding as it is known – could signal a renewed concern with structural imbalances in the U.S. economy. The U.S. has easily financed its massive current account deficit with foreign investment portfolio inflows but this may become more difficult as U.S. domestic financing needs increase. Second, to this end, the Bush administration released a draft of next year’s proposed US$ 2.77 trillion fiscal budget and announced it anticipates a budget deficit of about US$ 423 billion this year. The U.S. dollar is still being supported, however, by a renewed sense that the Federal Reserve has not yet finished tightening monetary policy. The fed funds futures contract is now pricing in about an 88% chance of a +25bps monetary tightening at the 28 March Federal Open Market Committee meeting, up from about 58% two weeks ago. A strong labour market that is near technical full employment and renewed wage price pressures have contributed to the view the Fed has at least one more rate hike to go. In fact, some dealers are already speculating the Fed will move rates higher on 10 May also. In eurozone news, it was reported that German December industrial output was off 0.5% m/m, defying expectations of a +1.0% increase. Euro offers are cited around the US$ 1.2060/ $1.2110 levels.

¥/ CNY

The yen moved sharply higher vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥117.60 level after failing to move above offers around the ¥119.15 level. Stops were hit below the ¥117.95 level, representing the 23.6% retracement of the move from ¥113.40 to ¥119.40. Chartists are eyeing the ¥117.40 level as the next downside target, representing the 50% retracement of the move from ¥121.40 to ¥113.40. Data released in Japan today saw January foreign reserves increase to US$ 851.67 billion meaning Japan still officially has the largest amount of foreign U.S. reserves in the world. Some traders moved into yen from dollars overnight ahead of tomorrow’s two-day Bank of Japan Policy Board meeting. Some are speculating the central bank may announce an early end to its long-standing quantitative easing policy but this seems unlikely now. The central bank has repeatedly said core consumer inflation must stabilize above zero per cent before it will begin to unwind its unorthodox monetary policy regime. Even then, it will likely take years for Japanese interest rates to normalize. Remarks from BoJ Governor Fukui are expected on Thursday and will likely offer the central bank’s latest thinking on interest rates. December household spending and machine orders will be released on Friday. The Nikkei 225 stock index shed 0.16% to close at ¥16,720.99. Dollar bids are cited around the ¥117.40/ 117.10 / ¥116.45 levels. The euro weakened vis-à-vis the yen as the single currency tested bids around the ¥141.10 level after peaking around the ¥142.60 level. The British pound and Swiss franc depreciated vis-à-vis the yen as the crosses tested bids around the ¥205.70 and ¥90.70 levels, respectively. The Chinese yuan depreciated marginally vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0578 in over-the-counter trading and at CNY 8.0566 in exchange-traded activity. A Chinese editorial printed today called on People’s Bank of China to conduct “pre-emptive fine-tuning…to maintain a balanced economy.”



The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7445 level and was capped around the $1.7515 level. Technically, the pair bearishly stopped short of testing offers around the $1.7530 level, representing the 50% retracement of the move from $1.7130 to $1.7935. Sterling was pressured after the release of a week BRC January retail sales growth survey that evidenced the most depressed sales growth in at least eleven years after the pre-holiday surge in December sales activity. Sales were up a mere 0.2% y/y, below expectations of a 1.5% improvement and a material deceleration from December’s 2.6% rise. A couple of negative surveys dented sterling today. First, one survey reported the manufacturing sector could lose another 24,000 jobs over the next three months while another survey reported U.K. pay pressures eased last month. Some Bank of England Monetary Policy Committee members are concerned that high oil prices will have second-round effects on consumer prices and wages. BoE’s MPC will convene tomorrow and Thursday to deliberate monetary policy but is not expected to alter policy at this time. Some traders, however, believe MPC could lower rates as early as next month. Cable offers are cited around the US$ 1.7560/ 1.7600 levels. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the £0.6860 level and was supported around the £0.6840 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2950 level after failing to get above the CHF 1.3025 level. Technically, today’s intraday low is right around the 61.8% retracement of the move from CHF 1.3195 to CHF 1.2555. Data released in Switzerland today saw the January unemployment rate rise to 3.9% from 3.8% in December. Some dealers moved into Swiss francs on increasing tension between Iran and the global community concerning the former’s nuclear ambitions. Iran has announced it will suspend all voluntary inspections by the United Nations of its nuclear facilities. Dollar bids are cited around the CHF 1.2885 level. The euro and British pound receded vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5540 and CHF 2.2645 levels, respectively.

 

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